Business Wars: Part III
The Logistical War
Business is war. We are in search of the victors and the attributes that make them victorious. Throughout this series we are looking at a framework to subjectively value the attributes of companies that are not listed on the balance sheet.
Business Wars are won or lost on the combination of these 6 areas
The Logistical War
1914 — Russia
The trucks sputtered to a halt. Then the food arrived rotten. The trains always rolled in late. There were never enough of the thin coats. Need a smoke? “Good luck”. For all that they were lacking, they had an abundance of two things; corruption and incompetency.
The Russian army of WWI possessed a greater inert capacity for warfare than perhaps any nation of the time. All of this capacity, this potential, meant nothing. The logistical failures of the Russian army were the throttle that held them back.
The cost of not being prepared didn’t just burn down the barn. It spread to the house. Revolution was in the air, as thousands of soldiers abandoned their posts each day. The Russian Tzar was visiting the troops on the front line when he heard of the mutiny developing back home. He didn’t grasp the crisis, missing the overwhelming need to plug the hole quickly on the sinking ship. His delay in action, would be his end. The family line which had ruled for 300 years was shattered.
On July 17th of 1918 — the entire family of Tsar Nicholas II was shot.
Date Unknown — Ancient Arabia
There once was a confident young prince who was going to his first war. He was marked by that pervasive ego which can only develop from an easy but in-charge childhood. Ignoring the advice of his father, he choose to go with the 20,000 men and horses that were gathered for the march. Reinforcements would have to catch up.
They were cheerfully sent off to the sounds of trumpets and cheering crowds. The only clouds on that glorious day, were in the heads of the generals, who knew how little had been planned. The Prince, of course, would figure it out along the way.
Now…it must understood…a large army is hard to feed. Most are surprised by what it takes to keep all those soldiers and horses from hunger during a grueling march. So as they journeyed through the lands of the Prince, the local farmers became their supplies. Full stomachs followed the free meal and before long the army needed to sleep. So they asked, rather demanded, that each homeowner to give up their beds for a few days.
As they continued the journey, mile upon mile — the army was consuming the land it passed. After a few days of eating and sleeping on the backs of the local people, they would continue to the next unsuspecting town. In time, the slow army would be outpaced by fast rumors. Angry rumors.
The young Prince, whom the people had always seemingly loved, began to develop a different reputation. Shouts of anger began to fill the halls of local towns on the road ahead. Men and women shouted protests against the inevitable loss of their precious food reserves, while the indignant slight of being put out of their homes rose as an even greater sin.
Late at night, a knock came on the heavy wooden door. Emissaries from a nearby Kingdom bowed, each with a trader’s smile on his face. They offered gold but more importantly, they promised freedom. The townspeople had until the next dawn to make their choice.
The Prince’s weary army had been marching for a week when they finally saw a town at the bottom of the valley. With glee, the men gave out a shout! They would finally be able to feast again. The march sped up as they thought of drinking beer to their hearts content and once again sleeping in a good bed.
“What is the meaning of this?!” — The Prince was in a rage. As the vanguard of the army had entered the town they were stunned. It was empty, not a soul in sight. Their horror only grew when they went to fetch water. The wells were poisoned! The fertile farm fields were burnt! The stores of wine and beer were missing!
The army had staggered around for a week, growing increasingly desperate. Searching for anything they could eat, theft came first, then mutiny. The poor souls were starving. Then they all saw it, the flag of their enemy. Like a nightmare, they stood on top of the ridge, before they silently came galloping down on the fatigued.
By nightfall the Prince was headless and his army surrendered. Against a force a tenth of their size, they were utterly defeated.
The prince’s ego allowed him to miss the importance of logistics. He thought a great army and the power of his name would be enough. He left without a supply line or any reinforcements.
In war it’s easy to focus on the leader, the castle or the weapons. We can forget that no matter how brilliant each is, there will always be failures.
The Logistical War is about failure; to avoid it and to recover from it. More armies have lost wars because they lost financial backing, than from a loss in a battle. Many other wars have been lost because a former ally suddenly turned to better prospects.
The best companies build great systems to weather storms. They then react extremely well when that inevitable storm strikes.
Supply Lines: The lifeblood of war
Every army must think about three main supply lines; Government, Capital, and Partners.
Government Supply Line
In the 1880’s, Standard Oil became a euphemism for crooked business dealings. The company developed a horrible reputation for anti-competitive business tactics. The strained local relationships with suppliers caused a great deal of this hate. Strong arm tactics against suppliers and merchants created an atmosphere of animosity.
This national animosity started to boil, until Standard Oil finally became burnt by government action against it’s interest. In the final review, the governments new laws against Standard Oil flowed from the outcry of the press. The attacks from the press came from the anger of the people. Reputation always begins with the smallest relationships.
The relationship that Standard Oil never thought would be a problem was the United States government. They weren’t the only company that has realized that your government is the ultimate wildcard in business. In America, it is easy to forget this fact. In countries like China, it’s always on the mind of business leaders.
Over $2.6 Billion dollars are spent each year on lobbying the US congress. Corporations aren’t wasting their money. They realize that protecting this “Supply Line” is the first and most valuable. The incredible amount of money spent gives us an idea in to how devastating a change in law can be.
Many American companies don’t have to actively worry about the actions of their government. Others however, such as Tobacco and Pharma, have to be extremely careful. Those in other countries, with less democratic rule, are often playing a much more precarious game.
Capital Supply Line
1775 — France
You can almost imagine their rare delight. A chance to poke an old rival straight in the eye. Enjoyment found in the folly of old foes is a cherished pastime for many countries.
The British were in a bit of a bind. Their lucrative colonies in the new world were revolting. The French felt obliged to help the Americans — of course they did. The Yankee’s were actively seeking help and Benjamin Franklin himself was doing the asking.
King Louis would begin sending supplies to the Americans. While lever of public opinion was with him, many of his counselors were not. They worried like an old kill-joy, “What is the cost?”
This is the age old problem with money. It has a habit of running away and never coming back. The only way to catch money is to cage it, behind strict budgets and limits on expenses. The French had no such limits. They willingly gave to a cause they felt both strategic and moral. “The American colonies must be free.”
In September of 1783, the Treaty of Paris was signed. Celebration ensued on both the New World and the old. The glow of victory can be blinding when the bulb first flashes. The French had helped the Americans win the war but the King’s advisers still whispered, “What is the cost?”
It was staggering. $1billion livres tournois were spent to help the Americans win the war. This money was double the annual government budget of France. Double! This debt was now a boulder around the neck of the French economy and it would become the greatest enemy the King would ever face.
Then it came. The French Revolution. The violence. The end of the monarchy. King Louis XVI was executed in January of 1793.
The King made the mistake of focusing on the attack and forgetting the overall health of his nation. Money was the Monarchies blood, while debt was it’s disease.
The Capital Supply Line represents the financial element that keeps a company or an army alive. The French had no capital in reserve nor did they have the ability to acquire more on credit.
Cash is the blood of a healthy organization. This most important Supply Line is represented by a companies relationship to their financial interests. Money isn’t just needed in times of disaster but also times of opportunity. Without capital, or the means to acquire it, an armies Supply Line is vulnerable to attack.
Fighting without a safe margin of cash, while relying on debt, is extremely dangerous. Some companies, with incredible growth, have been able to succeed with a full attack strategy. This is the exception. Most who try this end up like the French, unable to keep their suppliers happy and eventually dying to debt.
The Capital Supply Line also represents the goodwill of the shareholders of a publicly traded corporation. These owners can choose to change management if they lose confidence. The foolhardy Prince was deposed once the townspeople realized he was not a good representative for their interests.
Partner Supply Line
The blacksmith, the horse trainer, the guide, the cook. The design studio, the outside marketing team, the strategic partnership, the recruiting service, the cleaning staff. Think of this Supply Line as all of the people, groups and assets that make sure your army is prepared to win in battle.
A classic military maneuver has been to circle behind an enemy and cutoff their supply lines or to close them off to the sea in a naval blockade. Essentially this strategy goes after what makes an army strong, rather than directly confronting their strength.
In the American Civil War, the “Union Blockade” was crucial to victory. It kept the European powers from contributing food and weapons to the South. The North was able to use the blockade to starve them out and kill their morale.
Imagine a Fortune 500 company today, the suppliers, partners and groups they rely on to be at their best. While a “blockade” from a rival is generally impossible, think of the negative impact poor relationships would cause if they developed along these lines.
Transversely, strategic supply lines are some of the greatest advantages in business. Tim Cook was instrumental in developing the supply & manufacturing infrastructure that allowed Apple to become the most valuable company in the world. His relationships to part suppliers gave Apple a massive advantage in their offerings.
On August 18, 2011, rival HP introduced their challenge to the iPad, the “Touchpad”. 49 days later, they cancelled the entire project. Only later on did we learn of a major challenge facing the HP team. As they designed their product they kept having to adjust their vision — they couldn’t buy the materials they wanted!
Apple was taking up the best stock and had effectively created a brutal blockade by soaking up the supply of top manufacturers. The “Touchpad” didn’t work — not just because of lack of a software advantage (WebOS was ahead of it’s time) more importantly from lack of good hardware supplies.
The video game company, Electronic Arts — has an exclusive deal with the NFL for it’s Madden Football franchise. This has been highly lucrative for EA and the relationship with the NFL goes beyond the money they pay them. If EA were to lose this deal it would be a major hit. This partnership is strategic, and hence part of their supply line.
One of “Porters 5 Forces Analyses” focuses on the bargaining power of suppliers. The suppliers are those relationships you cannot live without. When evaluating an army or a company it is easy to overlook the role of suppliers and partners.
This is a mistake. We should be looking for clues into how strong each companies relationships are to all of their partners. Are these relationships creating a sustainable “win-win”?
Reinforcements: Handling Crisis
“Run, hurry. Quickly now! Grab anything that can float.”
The Nazi’s dominated the opening of WWII with their surprise blitzkrieg attack. Avoiding the heavily defended French lines, they instead took an indirect route trough the thick Ardennes forest.
The plan was risky, but it worked. The fast moving tanks of German engineering would sweep the French pieces off the board in just two weeks.
Now Britain stood alone and not just figuratively. On that early morning they stood quite literally alone on the beaches of Dunkirk. The majority of the British armed forces were stranded on a beach, completely exposed. The enemy was closing in and the fate of the free world was waiting for an evacuation.
Every boat that could make it across the channel was called to action. Literally anything that could float. There was a desperate rush, a breathless anxiety, to save their bravest. Jumping onto anything from a battle-cruiser to a fishing boat — the soldiers made it across the English Channel just in time to avoid utter disaster.
The British didn’t win the war at Dunkirk that day, not even close. The reason the country commemorates it every year is because they didn’t lose it. Not losing and winning are close bedfellows.
In war as in business, something always goes wrong. Every company must handle crisis by quickly bringing in help. Reinforcements can come in the form of decisive decisions, new capital expenses, changed plans, or restructuring of teams.
Think of the times a company has been faced with a major problem. Whether in missing a sales number, issuing a product recall, or dealing with a sudden departure of an executive. How have they handled crisis?
Supply Line strength is only tested in difficult times. It is easy to spend and borrow in good times. The crisis is what makes the army show it’s true strength. A strong company, like a strong army, avoids debt as much as possible. They conserve cash, knowing they will one day need it.
Every great nation is ultimately measured on how they prepare for and handle crisis. The greatest war stories are never about those lazy victories against average foes. They come from those moments when the winds of fate blow hard against them, forcing warriors to rely on the preparation they have constructed during times of peace.